As is known, the Communist Party of China is the domain party of China. The defined the Peoples Republic of China as a communism country. Although, Deng Xiaoping the former chair man of Chinese government has decide to change the economic system of China into a market economic system, the political nature of China was not been Changed. Although the Chinese GAAP is converging with IFRS, some rules will never be changed, such as the ownership of land.
What should be mentioned is that this essay will only focus on the Chinese accounting system after 1992, as the accounting system changed rapidly and significantly during the modern history of China.
Key Factors in the Business Environment
Political is the main factor which influences Chinese economic system along with the accounting system. Other factors do make influences, but with the direction of political. In many occasions, it is difficult to define whether one factor is political factor of non-political.
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The Communist Party of China identified Deng Xiaoping's theory to be the guidance of the Party and record it into the Party's constitution. Thus, Deng Xiaoping's theory became the basis of China's accounting theory.
The Party defined that the destination of Chinese economic reform is to build up the socialist market economy system and decided that the Minister of Finance will be in charge of the national accounting work (Guohua Zhang, 2005).
Economic & Political
The government decided to reform the State-owned enterprises. Thus, the MOF issued Accounting System for State-owned Enterprises.
The government decided to allow Sino-foreign accounting firms to be set up in China. Thus, the MOF issued Temporary Methods of Administration on Sino-Foreign Accounting Firms.
The government decided to reform the economic system in the countryside. Thus, the MOF issued Financial Systems for Village Cooperative Organizations and Accounting Systems for Cooperative Village Organization
The government decided to establish the modern business system. Thus, the MOF issued Temporary Regulations on Bankruptcy Accounting of State-owned Enterprises, and Temporary Regulations on Mergers and Acquisition Accounting etc.
The government decided to reform the tax system. Thus, the MOF issued Regulations on the Treatment of Value Added Tax Accounting, and Regulations on the Treatment of Business Tax Accounting.
The government decided to reform the fiscal system. Thus, the MOF issued Accounting Standards for Utility Entities, Accounting Regulations for Utilities Entities, Accounting System for Financial General Budgeting etc.
The government decided to reform the medical care and insurance system. Thus, the MOF issued Accounting System for Medical Care Agencies and Accounting System for Insurance Companies (Guohua Zhang, 2005).
International & Political
Sponsored by the World Bank, the MOF signed a treaty with Deloitte & Touché international accounting company in Beijing, who would offer consult and help Chinese government to establish its accounting standard in the following three years later.
Detailed accounting standards were researched and issues with the help of Deloitte, such as the emerging of foreign investment accounting, and multinational business accounting and The employment of positive accounting research method.
Legal & Political
The government decided to perfect and develop the legal system. Thus the MOF format the accounting legislature system and issued Certified Public Accountants Law, the Company Law, and the Bankruptcy Law etc.
The government decided to revise Accounting Law. Thus the MOF issued Rules on Enterprises' Financial Accounting Report and revised accounting standards.
Educational & Political
The government decided to reform the education system. New accounting curriculum has formed in universities and colleges, which is more towards international accounting system; Cooperative training class were held both in China and abroad; Onsite training become regular; National accounting colleges were established to offer advanced training for managerial talents .
Professional & Political
The MOF requires that the annual reports of state-owned enterprises should be audited by CPA. Thus CPA's audit for the business' annual report
Ministry of Finance
The China's Ministry of Finance (MOF), a governmental body supervised by the State Council, is the only entity authorized to promulgate Chinese accounting standards. The MOF determines the composition, timing, and implementation methodology for these accounting standards. The standards promulgated by the MOF are mandatory for Chinese business enterprises (KPMG, 2011).
China Accounting Standards Committee
Always on Time
Marked to Standard
The China Accounting Standards Committee (CASC) was established in 1998 as the authoritative body within the Ministry of Finance responsible for developing accounting standards. After it was formed, the CASC began issuing standards on such issues as the cash flow statement, debt restructuring, revenue, nonmonetary transactions, contingencies, and leases. All of these standards were aimed at converging Chinese accounting standards with International Financial Reporting Standards (KPMG, 2011).
China Securities Regulatory Commission
The China Securities Regulatory Commission (CSRC) regulates China's two stock exchanges: Shanghai and Shenzhen. It sets regulatory guidelines, formulates and enforces market rules, and authorizes initial public offers and new shares. A code of corporate governance was introduced in 2002.
The CSRC also issues additional disclosure requirements for listed companies. Thus, disclosure requirements for listed companies are established by two government bodies, the Ministry of Finance and the CSRC (KPMG, 2011).
Government vs. Association
In many western countries, like UK and USA, professional association are authorised to make the accounting standards. The situation is quite different in China. The China's Ministry of Finance is the only entity authorized to promulgate Chinese accounting standards. The Chinese Institute of Certified Public Accountants (CICPA) does not have right to set accounting rules. It is charged to set the requirements for becoming a CPA, administer the CPA examination, develop auditing standards, and is responsible for the code of professional ethics. Although there is a trend that the MOF began to ask more advices from CICPA when making adjustment of accounting standards, it is still a question whether the CICPA would be entitled to make some accounting rules in the future.
Summary of the Accounting Rules and Methods
Accounting Standards for Business Enterprises
In February 2006, the MOF issued the introduction of 39 new Chinese accounting standards. It consist a basic standards and the 38 specific accounting standards for business enterprise (ASBEs). The new Chinese accounting standards were adopted by all listed companies from 1 January 2007 and are being phased in over time for other companies and enterprises.
3 Types of Market Share
A-shares are those that are listed and traded in local currency and are available only to Chinese nationals. From December 2002 certain qualified foreign institutional investors (QFII) may purchase A-shares on Chinese stock exchanges but they must gain prior approval and must operate within a quota.
B-shares are issued domestically by PRC companies and until 2001 were available only to foreign investors. They are now also available to domestic investors holding foreign currency accounts.
H-shares are denominated in Hong Kong dollars and are also available only to foreign investors.
Legal Requirement for A-Shares Issuing
Any enterprise can issue A-share if it meets a series of legal requirements, the main ones being:
It must be aligned with the state's policies of industrial development.
It must be approved by both the local government and the CSRS.
The proportion of A-shares to total shares must be at least 25 percent (or 15 percent in the case of the largest companies listing in Shanghai) and the proportion of employees to total shares must be less than 10 percent.
In the last financial year, the percentage of net assets to total assets must me at least 30 percent and ratio of intangible tangible assets must be less than 20 percent.
It must have a good credit record over the last 3 years.
If a company does not meet these criteria but it is a high-tech, high-growth potential company it may list in the Shenzhen SME board.
The Section 3 of Securities Law (1999) sets rules for the continuing disclosure of information, stipulating that:
'The documents for the issuing and listing of shares or corporate bonds announced by companies shall be truthful, accurate and complete; they may not contain any falsehoods, misleading statements or major omissions' (Article 59).
Particularly important in this section of the Securities Law are Articles 61 and 62 which regulate the disclosure of information by listed companies.
Under Article 62, companies are required to inform the stock market and the public of any price sensitive or 'major' events.
Under Article 61, companies are required to submit, within four months of the year end, an annual report including:
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a brief account of the company's general situation;
the company's financial and accounting reports and business situation;
a brief introduction to the directors, supervisors, managers and senior management and information in their shareholdings;
details of shares and bonds issued, including names and shareholdings of ten largest shareholders;
Other matters specified by the securities regulatory authority.
They must also issue a semi-annual report within 2 months and quarterly reports within one month of relevant period-end. All of these must be published simultaneously in a corporate disclosure newspaper and website designated by the CSRC and available at the company's headquarters.
Since the Chinese government decided to build a market economic in China, the economic system is becoming more and more similar with western country along with its accounting system. As the governing of Communism Party of China and Socialism nature of this country, the accounting system will not be complete same as IFRS. At the same time, the MOF will do some necessary adjustment according to the economic development of China.
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